In Oakland v Wellswood (Yorkshire) Ltd, the Employment Appeals Tribunal (EAT) decided that an employee of a business in administration was unable to have the protection afforded to employees under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) when the business in which he was employed was transferred and continued as a going concern with the transferee. The decision is important news for administrators and purchasers of businesses in administration because it contradicts current Government guidance on this issue.

What happened in this case?

Oldco traded as a wholesaler in fruit and vegetables. In 2006 Oldco found itself in financial difficulties and went to administration. The administrators immediately transferred the assets and lease of the premises of Oldco to Newco, a subsidiary of one of Oldco’s major creditors. The book debts were not transferred and only five out of the seven employees were taken on by Newco. Those employees received redundancy payments from the Secretary of State and took salary cuts on joining Newco.

One of the employees taken on by Newco was Mr Oakland, the Claimant, who was a salaried General Manager of Oldco. When he was dismissed some time after the transfer to Newco, he brought a claim for unfair dismissal against Newco. Newco argued that the Claimant did not have the requisite one year’s service qualifying him to bring a claim but the Claimant argued his employment contract had transferred under TUPE, thus preserving his continuity of employment.

The Tribunal decided that the employment contract had not transferred to Newco under TUPE because of the exception in Regulation 8 (7). Regulation 8 (7) provides that the usual rules regarding transfer of employment contracts and liabilities (Regulation 4) and protection from dismissal (Regulation 7) do not apply “to any relevant transfer where the transferor is subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with the view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner”. The Claimant appealed to the EAT.

The critical question was whether the administration proceedings were “insolvency proceedings...instituted with a view to the liquidation of the assets”. If they were, the administration proceedings would fall within the exception in Regulation 8(7) and the employment contract would not have transferred. The Claimant argued that the business in administration continued to trade as before without interruption in the hands of Newco and that administration proceedings were not like a creditors’ voluntary winding up or a compulsory winding up by the Court (being the type of proceedings to which Regulation 8(7) was designed to apply).

The EAT disagreed with the Claimant, stating that whether administration proceedings fell within Regulation 8(7) was a question of fact. The Court accepted that where administrators continued to trade the business with a view to its sale as going concern, the exception will not apply. However, this was not the case here as immediately the administrators were appointed, steps were taken to sell the assets, with the book debts remaining with Oldco. This was seen as the best course for realising the optimum return for creditors in the final liquidation of Oldco. Therefore the Tribunal was entitled to conclude that the appointment of the administrators was with a view to eventual liquidation of the assets of Oldco. Accordingly, the exception in Regulation 8(7) applied and the employment contracts were not transferred to Newco under TUPE.

What does this case mean for employers and administrators?

The policy behind the exception in Regulation 8(7) (which is derived directly from the EU Acquired Rights Directive) is to facilitate a “rescue culture” so that a purchaser of an insolvent business is not deterred by the consequences of TUPE being applicable. The EAT said that the decision in this case accords with this policy, leading to an outcome where some (but not all) jobs were preserved and the creditors benefited from the best available option. This decision may be a hard pill to swallow for employees as it shows that they may not have the protection of TUPE even if the business in which they are employed is carried on by the purchaser as a going concern. As indicated by the EAT, whether the exception of Regulation 8(7) applies would depend on the facts of the case. It cannot therefore be said that this decision is authority for administrators to take advantage of Regulation 8(7) in every case. Indeed, where administrators continue the business as a going concern for some time after their appointment it would become less likely that the exception in Regulation 8(7) will apply. The alternative would be for the administrators to take advantage of the more limited exception in Regulation 8(6) which provides that the employees will transfer to the transferee but with a greater scope to vary their terms, and certain outstanding debts to the employees would be taken over by the Secretary of State.

Finally, it is important to note that the EAT has contradicted the view expressed in the BERR guidance that a relevant transfer in a context of an administration would always fall within Regulation 8(6) rather than Regulation 8(7) because the purpose (or main purpose) of administration is business rescue rather than liquidation. We consider that this case reflects the reality that in many administrations the objective is eventually to wind up the company in order to secure a better result for the creditors. However in every case where genuine rescue appears to be a possibility, there will be some uncertainty as to the position under TUPE so that potential buyers should take this into account when negotiating terms.